Lost in Transition
The European Bank for Reconstruction adn Development has attracted controversy for encouraging market-based economic development around the world. To find out what life is like inside the bank, Corporate Watch spoke to an ex-employee who asked to remain anonymous
What does the European Bank for Reconstruction and Development (EBRD) do, and why?
The EBRD was established in 1991 following the fall of Berlin wall. The motivation was to ‘help’ ex-Soviet countries transition to open, market-oriented economies and promote private and entrepreneurial initiative; in other words, to move from a socialist planned economic model to a more capitalist market-oriented one. There are a few points the EBRD uses to assess market transition, such as private sector involvement, removing dependence on government funds, environmental development and energy efficiency.
The countries in which it has a mandate to operate in didn’t vary much since the Bank’s inception (other than the addition of Mongolia in 2006 and Turkey in 2009) until last year when, following the uprisings in the Middle East, the SEMED (Southern and Eastern Mediterranean) countries were added: Egypt, Jordan, Morocco and Tunisia, as well as Kosovo.
There are 64 shareholders, which are predominantly countries. The European Investment bank and the EU are also shareholders. Europe has the biggest seat, and is hence the majority shareholder, but others such as the USA and Japan are also present.
The EBRD issues “triple-A” rated bonds in the market and this is where the money that it invests originates from. However, the Bank also has a pool of money that comes from its shareholders. The EBRD invests in 30 countries; those in the CEB region (central Europe and the Baltic countries), south-eastern Europe (Balkans), Russia, Turkey, and Central Asia.
The bank is based in Liverpool Street and about 1,200 people work in the head office. The employees (mostly bankers) are spread through many different industries, such as the financial industry, telecoms, energy and the environment. There is an economics department with about 40-50 people, which was has grown from 30 a few years back. The economics department is considered the “policeman” of the bank as it assesses the transition impact of the projects. There is a law department as well, and numerous others.
What kind of projects does the EBRD fund?
The EBRD is a profit-making institution. It doesn’t give grants, it gives loans. The idea is that it offers funding to companies that wouldn’t be able to access it on the market.
The Bank examines the different sectors of the economy and allocates funds to them. Every three years a country strategy is compiled for each country, and each year there is a strategy update. Through this process, all the different sectors are examined (power and energy, infrastructure, financial industry, telecoms, agriculture) and assessed in terms of how open and market-oriented they are; trying to identify where the biggest gaps lie. In more developed countries, the gaps are often in the financial industry, because that is often the last sector that is fully developed.
The strategy papers are written in collaboration between the different departments, so involve economists, lawyers, bankers.
This then goes to the board, and then to the countries themselves to pinpoint the gaps. The projects the Bank funds have to be in line with these strategies.
Give us an example of a strategy.
Well it depends on the country and the state of each sector. Let us say we are looking at the financial industry in Poland: there are a few points within it that are analysed, such the extent of private equity, the loans to deposits ratios, the state of foreign direct investment.
Within these sectoral breakdowns there is a grading. Within this grading the Bank assesses how marketised a country is and where the gaps lie in comparison to other countries. These gaps then identify where investments should be made according to the strategies.
For example, some specific areas that the work is focused on are food security, energy efficiency and local currency lending. In many countries, especially in Central Asia and central Europe, foreign currency is mainly used, especially for loans, and this was part of a movement to focus more on local currencies, and not rely so much on the US dollar or the Swiss franc.
The EBRD program aims to promote the use of local currency for banks and local firms and hence have the correct interest rates for the relative markets. If a bank is lending and borrowing in Swiss francs then the interest rates would be lower than if lending in the local currency and this skews the market.
Have you got any examples of the sort of gaps you have identified?
The bank discusses the gaps in terms of whether a particular sector has a high, medium or low gap in comparison to other countries and other sectors. In Central Europe and the Baltic countries, there would be very few high gaps because the countries are already developed in comparison with other EBRD countries of operation. So you are always comparing against other countries, and also within the regions as well.
The Bank looks at an array of different indicators and the total sector gap is a combination of many such smaller indicators.
For some sectors and countries it is easier to collate these, whereas for others, the process is much harder due to data availability and ‘quantifiability’ of the information.
A model is created (which is updated annually) and this then results in the corresponding gap for each sector within each country. This is the basis by which funding is justified.
As the EBRD is an international development bank, all these aspects need to be considered. The Bank can’t just invest somewhere because there is an opportunity. Investments in a project are only made if there is a transition impact – and this impact is based on market-based development.
The projects can either be initiated by the bankers contacting the clients, or the clients contacting the bankers. In the past, there used to be a higher demand for these loans, but recently (the last five to ten years) the demand has fallen, as there is more competition in the supply of loans. Now, most of the agreements are initiated by the bankers going out to the countries of operation through the Regional Offices and approaching clients.
Additionally there is a department dealing with smaller clients - the Turnaround Management and Business Advisory Service. This department promotes good management in the small and medium enterprise sector within a region, providing direct support to individual enterprises.
Additionally, the EBRD implements the Business Environment and Enterprise Performance Survey in partnership with the World Bank, which examines the quality of the business environment as determined by a range of interactions between firms and the state.
There is also the Life in Transition survey, which analyses how transition has affected the lives of people in the region, examining corruption, bureaucracy, and life more generally in these transition countries.
The EBRD does a lot of research as well, working with other multilateral banks to write reports and produce publications. Every year the economics department, for example, produces the “Transition Report”; which has a specific focus each year – for example bank lending, or the environment.
What other development banks are there?
There is the World Bank, based in Washington, the African Development Bank based in the Ivory Coast (but currently in Tunisia), the Asian Development Bank, in the Philippines, and the Inter-American Development Bank based in Washington, working in Latin America.
These are the main ones. Each development bank has its own countries of operation. Initially the EBRD worked solely with the ex-soviet countries and last year, there was an agreement to extend the countries of operation to include some countries of North Africa and the Eastern Mediterranean region.
No funds have yet been disbursed to these countries, but the EBRD is helping with the ongoing privatisation schemes.
In this respect it has also collaborated with the International Finance Corporation (IFC), the private lending arm of the World Bank, and we have also been involved with them.
How are the impacts of the EBRD loans assessed in relation to social factors, or impact on communities, and people?
The Life in Transition survey assesses the impacts of the loans, and examines how things are changing in the countries of operation over the long run, looking mainly at social factors. Within the country strategy, social factors such as education and literacy rate are also examined.
At what point will its work be unnecessary?
One country has already graduated – the Czech Republic. Poland and Hungary are in the graduating process. However due to the current economic crisis, this process has been prolonged.
What kind of criticism does the EBRD receive?
Not all countries need to transition to a market-based economy to develop. It might be appropriate in some countries and not in others or in some sectors and not others. I don’t think it is right to have one size fits all model.
It is also quite top down development work. It is not clear how heavily the loans impact the people. There is a bit of a schism between the two. And the bank works primarily with big institutions. There is only one department that works with small businesses.
What about campaigns against EBRD-funded projects, including gold mines in Kyrgistan and gas and oil in north-east Russia, for example.
I don’t know specifically. When you are working in countries, especially in this region of the world, where corruption is prevalent and where there are natural resources, there is bound to be some sort of corruption. But at the same time, it has been said that the EBRD has invested in projects that are not ethical or good for the long term sustainability of the country or ‘good development’. However the Bank does aim to make ‘good’ investments.
In addition, some decisions are indeed quite politically influenced. For example Russia receives a large portion of the funds in comparison with other countries with much larger transition gaps, and hence much greater needs for the investments. It seems like there are political agreements and motives about where the money goes but then again, this is probably the case with all multilateral development banks.
